Working Paper: CEPR ID: DP6761
Authors: Hans Gersbach; Volker Hahn
Abstract: We examine whether the publication of forecasts concerning the likely future conduct of monetary policy is socially desirable. Introducing a new central bank loss function that accounts for the deviations from announcements, we incorporate forecasts about future inflation and interest rates into a dynamic monetary model. We show that the announcement of future interest rates is always socially detrimental. However, medium-term inflation projections tend to increase welfare.
Keywords: central banks; commitment; ECB; Federal Reserve; policy inclinations; transparency
JEL Codes: E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term interest rate announcements (E43) | decrease in central bank's ability to adapt to real-time economic conditions (E58) |
| decrease in central bank's ability to adapt to real-time economic conditions (E58) | negative impact on social welfare (D69) |
| short-term interest rate announcements (E43) | negative impact on social welfare (D69) |
| medium-term inflation projections (E31) | increase in social welfare (H53) |
| medium-term inflation projections (E31) | tradeoff between commitment gains and flexibility losses (D23) |
| tradeoff between commitment gains and flexibility losses (D23) | favorable welfare implications (D69) |